REAL ESTATE AUCTIONS

The fastest growing segment of the Real Estate Industry is the use of Auctions and the Auction Marketing method.

Many people believe that all auctions of property reflect that the property is distressed. Although the recent turmoil in the market would seem to back that up, the use of Auctions was up 40 % before any of the downturn in the housing market came to pass.

For an auction to be successful there are some key factors:

The property must be exposed properly

The prospective buyers must be educated as to the value of the property

The auction must create urgency to act

The first point is important because the auction method is really a specific marketing tool for the Real Estate industry. There must be massive exposure to the potential buyers. While local buyers are not uncommon, often due to economic conditions and volatility, the best prospect may be in another state or even another country. The further the reach of the marketing campaign, the more people who will potentially bid and the higher degree of success for the seller.

Secondly, the potential buyer must be compelled to investigate the subject property in further detail. This is accomplished with strong direct mail, targeted email, signage, TV and print advertising and Public Relations and press releases. The goal is to create a “buzz” and a sense of urgency. “Be there or miss out” is the message.

There must be plenty of information available to the potential buyer, as the timeline for decision making is accelerated. This is a sale with a deadline and all the prospective buyers must be ready to go on the day of the auction.

There are several kinds of auctions and if you plan on attending and bidding you would be advised to learn all of the types of auctions and the rules that accompany the various strategies of the auction process.

RECENT PROPERTIES SOLD BY AUCTION MARKETING...

Basically there are two types of auctions with some variations within the categories.

ABSOLUTE AUCTIONS

In an Absolute Auction the property will be sold to the highest bidder regardless of price. Most sellers when they hear of Absolute Auctions they say, I can’t take that kind of risk. What if my $500,000 house sells for only $50,000 ! If the 3 key factors are met above and the marketing and EXPOSURE of the property is done properly, I submit that is an impossible outcome.

Supposing there are several comparable sales that merit the $500,000 “value” of the home being sold. If there are 5, 10 or 20 willing and able buyers at the auction, the bidding will continue until near or ABOVE the $500,000 “value. In other words, if you were standing at the auction and the subject property was about to sell at $50,000 would YOU bid ! Of course ! And this process keeps repeating itself until the true value of that property for that place and time is reached.

In an ascending market like we experienced in Florida in the 2002-2005 period the auction method actually brings in higher results than traditional real estate ( assuming the key factors of marketing are followed) . How? Because the assembled bidders know that prices trending up and will compete to purchase today to avoid the higher prices tomorrow. There are many psychological factors as well that bring these results. Competition, Status, Not wanting to Lose, Peer pressure and sheer excitement. Also the fact that the true competition for the property is valid and verifiable solidifies the value of the purchase. Instead of a prospect being told….”I got another couple really interested, so don’t wait to make an offer. “ in the auction scenario the “other couple” is right in the room with them counter-offering.

In a descending market or buyers market as we are experiencing today, the auction process “freezes” the market in the local of the auction as none of the buyers for that neighborhood want to proceed until they see the outcome of the auction. Also auctions are valuable in descending markets because the time to close is 60-90 days from the beginning of the marketing. I can’t tell you how many sellers have held on in a descending market only to extend the carrying costs and eventually selling lower than the year ago prices. A recent home auction seller who was less than elated the day of the auction, 6 months later, now sees that the auction removed the burden, cut carrying costs, and “stopped the bleeding” in the volatile Arizona market. He would now be looking at several more price cuts if he was selling it traditionally.

So, in summary, the Absolute Auction, while at first blush may seem to be “risky” will actually bring many more potential buyers into the buying arena and will increase the bidding and the probability of a successful outcome.

RESERVE AUCTION

The Reserve Auction is an auction where the seller has a minimum or reserve that they are not willing to go below. The problem with the reserve auction is it does not provide the buyer with any sense of control. The only way a reserve auction works in the current market is by stating the reserve and setting it low enough for the potential buyers to act.

By example, if I advertise a $1 million dollar home will be auctioned off this Saturday with a reserve of $900,000 how many people do you think would attend?

ZERO. Because the buyers believe that they are being led to pay the Sellers price not the price they are willing to pay. ( Even though once they viewed/researched the property they may find the value of $1 million to be very reasonable) Sotheby’s Auction house calls this “suspended disbelief”. The notion that the buyer is in control and will pay the price they want to pay. It is what creates the “sizzle” of the auction and why the urgency that is missing from the market can be infused by the auction method.

Creating a marketing campaign for a reserve auction that does not state the reserve is a waste of advertising dollars. Yet many auction houses still go down this road. They may advertise that the reserve is “50% of a recent appraisal.” Well, 50% of a 24 month old appraisal may be ABOVE market value in some areas, especially in the so called bubble states. I submit that savvy Buyers do not respond to this advertising. A low stated reserve or no reserve (absolute) is the true power of the auction marketing method.